Bloomberg News

Saudi’s Allure Undimmed for Bechtel to DaVita Amid Fallout (1)

February 26, 2014

Saudi Arabia has never been a more inviting market for U.S. businesses, even as it poses foreign-policy headaches for the Obama administration.

DaVita HealthCare Partners Inc., the second-largest U.S. dialysis provider, will double its international operations with 80 new treatment centers in the Arab world’s biggest economy. San Francisco’s Bechtel Group Inc. won a $9.4 billion contract, its biggest lump-sum project ever, to lead construction of metro lines in Riyadh. BlackRock Inc (BLK:US).-backed SunEdison Inc. said this month it’s exploring a $6.4 billion solar power plant.

Saudi rulers, whose alliance with America dates back to World War II, have openly disagreed with President Barack Obama on how to respond to Syria’s civil war and political turmoil in Egypt. They’re also uneasy about the prospects of a thaw between the U.S. and Iran. None of that is stopping a wave of U.S. trade and investment driven by political, economic and demographic change in the world’s biggest oil exporter.

“Even if there are political tensions periodically, we felt like there is a long history here, and we were comfortable as one could get,” Denver-based DaVita’s Chief Operating Officer Dennis Kogod said in a phone interview on Feb. 16 after signing an agreement for the care centers, worth $261 million according to Al-Riyadh newspaper. “Whatever dollars we invested here would take care of themselves.”

Fastest Growth

Among America’s 15 biggest trade partners, Saudi Arabia is the fastest-growing market for U.S. exports, which jumped by almost two-thirds to $19 billion in the three years through 2013, according to the U.S. Commerce Department. Even that doesn’t capture the extent of the boom, according to an official at the U.S. Embassy in Riyadh.

More than $7 billion of exports to the United Arab Emirates also end up in Saudi Arabia, and there’s also almost $8 billion spent by Saudis studying in America, which constitutes exports of U.S. services, and about $2 billion in activities such as engineering, construction, and financial and legal services that don’t show up in the trade figures, according to the official, who asked not to be identified because of customary rules. He put the total of U.S. goods and services exports to Saudi Arabia last year at $36.2 billion.

That record figure came in a year when political ties were unusually fraught.

Rare Criticism

The U.S. decision to abandon plans for military action against President Bashar al-Assad provoked a rare spate of Saudi criticism. Senior royals called the shift a threat to regional security, and signaled they may channel support to Islamist fighters in Syria instead of U.S.-backed rebels. With Obama due in Saudi Arabia next month, there are signs of efforts to patch up the disagreement, including Interior Minister Prince Mohammed Bin Nayef’s recent talks in Washington.

“Obama’s visit will probably settle things down a bit, but the differences in priorities and tactics are real,” said Gregory Gause, a professor of political science at the University of Vermont in Burlington and a Gulf specialist. On regional politics, the countries are no longer “automatically on the same page.”

Yet the Arab revolts that led Saudi and U.S. diplomacy to diverge are also, indirectly, creating opportunities for business ties. That’s because King Abdullah, relieved to have escaped the regional turmoil, is ramping up spending to keep things that way, and American companies like Bechtel and DaVita are among those benefiting.

Outpacing Washington

Saudi Arabia already had a multi-year stimulus plan in place when protests spread through the Middle East in 2011, prompting Abdullah to add another $130 billion. Spending jumped about 20 percent a year in 2012 and 2013, though the pace is due to slow this year.

Government programs aim to ward off unrest by creating jobs and improving services, and make the kingdom less dependent on oil. They helped the economy grow 3.6 percent last year, forecast to accelerate to 4.4 percent in 2014.

Underlying the politics are demographic shifts in the form of rapid urbanization and population growth.

“When the Washington DC metro opened in the late 70s, Washington DC and Riyadh were exactly the same size -- 600,000 people,” said David Welch, Bechtel’s regional president for Europe, Africa and the Middle East, in a phone interview. “DC today is still 600,000 people, but Riyadh is nearly 5 million.”

That’s creating a surge in demand for health, education and housing, as well as transport projects like the one Bechtel is building, said Welch, formerly a U.S. diplomat in Saudi Arabia and Egypt. “In this next generation you are going to see a revolution in public transportation in the region,” led by Saudi Arabia, he said.

Shipboard Meeting

Bechtel’s ties with Saudi Arabia are almost as old as America’s. It has been building oil refineries, industrial cities and airports in the desert kingdom for 70 years.

The national relationship began about a decade earlier, when Standard Oil of California won a concession for exploration. It was cemented with the famous 1945 meeting between King Abdul-Aziz Al Saud and President Franklin D. Roosevelt abroad the USS Quincy. The U.S. provided security for the Persian Gulf fields that hold three-fifths of the world’s crude, and Saudi oil and contracts flowed the other way.

The tensions over Syria aren’t the first in the alliance’s history. Disagreement over the Arab-Israeli conflict prompted the Saudi-led oil embargo of 1973, which unlike the current dispute caused economic damage in the U.S., as surging crude prices drove inflation up.

Consumer Culture

Since then, the kingdom has become one of the main overseas customers for defense companies such as Lockheed Martin Corp. and Boeing Co. (BA:US) Alcoa Inc., the largest U.S. aluminum producer, has a 25 percent stake in an integrated aluminum project with Saudi Arabia Mining Co.

Companies such as Saudi Basic Industries (SABIC) Corp., the kingdom’s biggest by market value, may invest in the opposite direction. Sabic said in July it’s examining the chemical and polymer business in the U.S. The interest is “really all to do with shale gas,” Chief Financial Officer Mutlaq al-Morished said in response to e-mailed questions. “This has made the U.S. very attractive for chemical companies.”

Today, a walk down Tahlia Street in central Riyadh reveals no sign that political differences are hurting U.S. companies, instead highlighting the emerging consumer culture that offers them new markets. There are at least four stores selling Apple Inc. (AAPL:US) products and young men browse through a GAP Inc. (GPS:US) store. Saudis line up at Elevation Burger, drink coffee at Dunkin’ Donuts and dine at Applebee’s.

Some of those habits are creating a different kind of investment opportunity for companies like DaVita, whose biggest shareholder is Warren Buffett’s Berkshire Hathaway Inc. Dietary changes have contributed to obesity and diabetes rates that are among the world’s highest.

“It’s a market that’s growing more quickly than a lot of countries,” DaVita’s Kogod said. “There is just a need for what we do.”

Peter Grauer, the chairman of Bloomberg LP, the parent company of Bloomberg News, has served on DaVita’s board since 1994.

To contact the reporter on this story: Glen Carey in Riyadh at gcarey8@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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